How Should a Charged-Off Account Be Reported?

A charged-off account is a debt that a creditor has written off as unlikely to be repaid after prolonged delinquency. Even though the creditor no longer considers the account active for their internal accounting, the consumer is still legally responsible for the debt. Properly reporting charge-offs is critical to ensuring compliance with the Fair Credit Reporting Act (FCRA) and maintaining accurate credit records.

Understanding Charge-Offs

A charge-off typically occurs when a consumer’s account has been delinquent for 120 to 180 days, depending on the type of account (e.g., credit card, installment loan). The lender declares the debt as a loss and removes it from their active accounts, but this does not mean the debt disappears.

Once an account is charged off, the lender may:

• Sell the debt to a collection agency.
• Attempt to collect on their own while reporting the account as charged off.
• Offer the consumer a settlement to close the debt.

Steps for Reporting a Charged-Off Account

1. Update the Account Status to Reflect Charge-Off:
   • The account should be marked as “Charged-Off” with the appropriate Account Status Code.
   • The balance should remain unless the debt is transferred, settled, or paid off.
2. Include the Date of First Delinquency (DOFD):
   • The DOFD is the date when the account first became delinquent before being charged off.
   • This is critical for ensuring that the charge-off is removed from the consumer’s credit report after seven years, as required by the FCRA.
3. Use Special Comment Codes for Additional Clarity:
   • If the debt was sold to a collection agency, a Special Comment Code such as “Transferred to another lender” should be included.
   • If the account was settled, use “Settled for Less than Full Balance” to indicate the resolution.
4. Adjust the Balance if Paid or Settled:
   • If the consumer pays off or settles the charged-off debt, update the balance to reflect this.
   • If the consumer disputes the charge-off, the account should reflect the dispute status until resolved.
5. Notify Consumer Reporting Agencies (CRAs) Consistently:
   • Ensure that all updates, including the charge-off status, DOFD, and payment history, are sent to all relevant CRAs.
   • Inconsistent reporting across agencies can lead to consumer disputes.

Compliance with the FCRA

The FCRA mandates that credit reporting be:

• Accurate: Ensure that the charge-off date, balance, and status reflect the true state of the debt.
• Complete: Report whether the debt was transferred, sold, settled, or remains outstanding.
• Timely: Charge-offs must be removed after seven years from the DOFD.

Impact on the Consumer’s Credit Report

1. Credit Score Considerations:
   • Charge-offs are serious negative events that can significantly lower a consumer’s credit score.
   • However, once the charge-off is paid or settled, the credit impact may lessen over time.
2. Transparency for Lenders:
   • Clearly reported charge-offs help lenders assess a borrower’s risk profile when evaluating new credit applications.

Conclusion

Reporting charge-offs accurately is essential for FCRA compliance and fair credit reporting. By properly updating account statuses, including the DOFD, using Special Comment Codes, and ensuring accurate balances, data furnishers help protect consumer rights while maintaining the integrity of the credit system.